Bull Whip Effect

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❑ What happens when a supply chain is plagued with a bullwhip effect ?

❑ The common symptoms of bullwhip effect could be:

▪ Excessive inventory,

▪ Poor product forecasts,

▪ Insufficient or excessive capacities,

▪ Poor customer service due to unavailable products or long backlogs, uncertain production
planning

▪ High costs for corrections, such as for expedited shipments and overtime.
Causes of the Bullwhip Effect

❑ Four major causes of bullwhip effect:

▪ Demand forecast updating

▪ Order batching

▪ Price fluctuation

▪ Rationing and shortage gaming

Demand forecast updating

Every company in a supply chain usually does product forecasting for its production scheduling,

capacity planning, inventory control, and material requirements planning.

When a downstream operation places an order, the upstream manager processes that piece of

information as a signal about future product demand.

Based on this signal, the upstream manager readjusts his or her demand forecasts and, in turn, the

orders placed with the suppliers of the upstream operation.

It is intuitive that, when the lead times between the resupply of the items along the supply chain are

longer, the fluctuation is even more significant.

Order Batching

❑ Two forms of order batching:

▪ Periodic ordering

▪ Push ordering

❑ Players often batches or accumulates demands before issuing an order.

▪ Time and cost of placing order

▪ Manufacturer run MRP before placing an order

▪ Slow moving items

▪ Economies of scale- transportation

▪ Push Ordering- Hockey stick phenomenon

Price fluctuation

❑ Forward buy- due to attractive price offer items are bought in advance

❑ 80% of the transactions between manufacturer and distributor are forward buy

❑ Manufacturer or distributor have special promotions e.g. price discount, quantity discount,
coupons, rebates.

❑ What happens when a forward buy happens?

❑ As a result customer buy in quantity that do not reflect their immediate needs.

❑ In case of forward buy, manufacture may ask workers to do overtime in peak demand season

and layoff them when demand is low.

Rationing and Shortage gaming

❑ When product demand exceeds supply

❑ Manufacturer allocates the amount in proportion to the amount ordered

❑ In result, customer exaggerate their real needs

Mitigation of Bullwhip effect
Thank You